Supply and Demand

Markets

In economics, Markets can be defined broadly or narrowly, depending on our purpose.

Aggregation

The process of combining distinct things into a single whole.

Product Markets

Markets in which firms sell goods and services to households.

Resource Markets

Markets in which households that own resources sell them to firms.

Circular Flow

A simple model that shows how goods, resources, and dollar payments flow between households and firms.

*Circular Markets

Competition in Markets

When we think of competition in markets, economists classify them as either an “imperfectly competitive market” or as a “perfectly competitive market”.

Perfectly Competitive

In a perfectly competitive market, individual buyers and sellers CANNOT influence the price of the product.

Imperfectly Competitive

In an imperfectly competitive market, individual buyers and sellers can influence the price of the product.

Automobile MarketLaptop Market

Lets look at cars and computers!

Laptop Market

Classic Car Market

Supply and Demand

The supply and demand model is designed to explain how prices are determined in “perfectly competitive markets”.

Quantity Demanded

The amount of a good that all buyers in a market would choose to buy during a period of time, given the constraints they face.

Law of Demand

As the price of a good increases, the quantity demanded decreases.

Ceteris Paribus

Latin for “all else remaining the same.”

Demand Schedule

A list showing the quantities of a good that consumers would choose to purchase at different prices, with all other variables held constant.

Demand Schedule

Demand Curve

A graphical depiction showing the quantity of a good or service demanded at various prices, with all other variables held constant.

Demand Curve

Change in Quantity Demanded

A movement along a demand curve in response to a change in price.

Change in Demand

A shift of a demand curve in response to a change in some variable other than price.

Change in Demand

Income

The amount that a person or firm earns over a particular period of time.

Normal Good

A good that people demand more of as their income rises.

Inferior Good

A good that people demand less of as their income rises.

Wealth

The total value of everything a person of firm owns (assets), at a point in time, minus the total value of everything owed (liabilities).

Substitute

A good that can be used in place of some other good and that fulfills more or less the same purpose.

Homework

Read and be prepared to discuss vocabulary for SUPPLY in pages 65 through 80.